1. Demographics and Finance
While the developed world grapples with an ageing population and overindebted economies, this region enjoys widespread low debt, while some countries enjoy substantial FX reserves. Financial intermediation remains low but is increasing through the adoption of recent technology, creating a positive feedback loop of increasing productivity gains and higher asset values.
2. Abundant Natural Resources
The region is very rich in minerals, oil and gas, agriculture, water and rare earths. Kazakhstan for example, ranks in the top 5 globally for reserves of Tungsten, Uranium, Chrome, Manganese, Silver and Lead. Meanwhile, Uzbekistan has the world's largest gold mine. The Oyu Tolgoi project in Mongolia and the Kashagan field in Kazakhstan are expected to provide between 1.5% and 2% of the global supply of copper and oil, respectively.
3. Uncorrelated returns
Due to limited foreign capital in these regions, frontier market returns are driven more by local factors, which are often relatively uncorrelated to global markets. This provides a good source of investment diversification. Moreover, frontier markets are under-covered by mainstream analysts and so have greater inefficiencies regarding price discovery. Of the 12 countries in our investment universe, only three are covered by MSCI indices and the only regional benchmark was discontinued three yers ago. These challenges and idiosyncrasies create investment opportunities.
Valuations in the region tend to be heavily discounted compared to their frontier market peers, which in turn trade at a discount to developed market indices. For example, the dividend yield of the MSCI Kazakhstan index is 6.35% and the price-to-earnings ratio is 5.65x consensus earnings estimates for 2019; but MSCI Frontier trades on half that dividend yield and twice the price-to-earnings ratio(as per Bloomberg, 28/9/2018).
5. Cultural Heritage
The Silk Road comprised a network of trade routes that, prior to the dominance of maritime trade, connected leading kingdoms and empires. For much of the past two millennia this region included some of the most sophisticated centres of culture, science, wealth and arts. Modern medicine and astronomy, for example, owe a huge debt to the work of Avicenna, a Persian polymath born in present-day Uzbekistan. Romans, Greeks, Egyptians, Mongols, Indians, Chinese all traded goods and exchanged ideas along the Silk Road. Today, the Silk Road is regaining prominence due to its extensive resources, improving infrastructure and technological upgrades. The Belt and Road Initiative is key to this resurgence.